ANNABEL CRABB, PRESENTER: In the months leading up to the federal election Tony Abbott's Coalition complained long and loud about what it called a budget emergency created by Labor. The situation was so dire we were told it would take years to get Australia back into the black. Today the Government unveiled the details of its much awaited commission of audit which will reveal the true state of the Budget and review all Commonwealth spending with the aim of radically cutting costs. At the same time, in what may seem a contradiction, the Government has announced it is massively increasing the Commonwealth's debt ceiling to $500 billion.

We'll hear from Treasurer Joe Hockey shortly. But first here's chief political correspondent Sabra Lane.The solution is not more government, it is less government.

SABRA LANE, REPORTER: For more than a year the Coalition's laid the groundwork for its commission of audit.

TONY ABBOTT, PRIME MINISTER (ARCHIVAL): There is now a budget emergency.

SABRA LANE: Key figures have flagged here and abroad the current level of Commonwealth spending can't be sustained. Otherwise future generations will pay.

JOE HOCKEY, TREASURER: Obviously the age of entitlement is coming to an end because governments are running out of money.

TONY ABBOTT: Government has to live within its means as families and businesses do.

JOE HOCKEY: We're going to cut the programs that do not work.

SABRA LANE: It's one thing to talk hard decisions; it's another to make them.

The last federal commission of audit was done in 1996 under John Howard and Peter Costello. And some of it was political dynamite and acknowledged so at the time.

PETER COSTELLO, FORMER TREASURER (ARCHIVAL): The Government doesn't automatically accept every recommendation that it makes. The Government decides its own policy. The Government reserves that right and the government always will.

SABRA LANE: Tony Shepherd, the President of the Business Council of Australia will head the audit commission.

He will be helped by four other commissioners including the former Federal Liberal minister Amanda Vanstone who has experience in managing social welfare.

JOE HOCKEY, TREASURER: The last one was done in 1996. It is time to do it again and we are doing it. It's going to be very thorough and very comprehensive.

PETER COSTELLO: It's going to take a lot of political will.

SABRA LANE: The man who ordered the last audit in '96 and who headed up Queensland's commission of audit says the Abbott Government must be prepared to put in place tough, unpopular decisions.

PETER COSTELLO: There will be some entitlements that the Government just can't keep affording to pay, particularly if it wants to introduce new entitlements. So you want to have new entitlements in relation to school funding, Gonski funding that will mean that there will have to be adjustments elsewhere. You want new entitlements in relation to disability care that will require adjustments elsewhere. There's not that much discretionary spending in a budget and so that means where there is discretionary expenditure you've got to be pretty hard in those areas.

SABRA LANE: An interim report will be given to the Government by the end of January. The final report's due by the end of March, well in time to allow Joe Hockey to incorporate recommendations and cuts in his first Budget expected next May. Nothing's off limits. The commission's been asked to identify wasteful spending, unnecessary duplication, what Commonwealth assets can be privatised, whether departments should be closed or consolidated and the sustainability of the Budget over the long term. And that last point is crucial. Spending on health, pensions, education, defence, disability care, and paid parental leave are all set to soar in the years ahead given recent election promises and the ageing population.

And it's spending the Government will struggle to meet given the collapse in company tax receipts, the shrinking taxpayer base and the Coalition's commitment to return the budget to surplus. It could mean some measures introduced in the Howard/Costello years might be axed.

PETER COSTELLO: Well to fix the budget they will need to put some unpopular measures in place. Now what worries me is that if you look at the forecasts you see the budget coming back and improving over the next three years but if you look further than that, you get this enormous spending beginning to hit with disability care and after that the impact of the ageing of the population.

SABRA LANE: Bob Officer who headed the 1996 audit thinks with five months to investigate, hold public hearings and report back, the new Commission will be limited in what it can recommend.

BOB OFFICER, 1996 AUDIT CHAIRMAN: I would think it's a very tight time frame. There is, as you will appreciate, anyone who has read the terms of reference, they are quite ambitious and in many ways I think they will be pointing in directions rather than being able to tell the Government how they might go about executing some of their recommendations.

SABRA LANE: Legacies from the '96 audit include the Future Fund to deal with the Commonwealth's unfunded superannuation liability and the Charter of Budget Honesty.

PETER COSTELLO: Could we have done more? I wish we'd put more into the future fund that we'd been able to lock away more because as you know, a lot of what we did has now been undone, but this process will have to start again.

SABRA LANE: In revealing the audit Joe Hockey unveiled a surprise and it was a big one given for years he's railed against the Rudd and Gillard governments for increasing the nation's debt ceiling. The Treasurer announced plans to lift Australia's debt limit from its current level of $300 billion to $500 billion. The Treasury Department predicts Australia will reach the current limit this December. Mr Hockey says the $200 billion buffer is to avoid events like the recent US shut down. The Opposition, not surprisingly, views it differently.

TONY BURKE, OPPOSITION FINANCE SPOKESMAN: The party that said they were all about turning around debt has now asked for permission for it to go to $500 billion. This is a very different Government to who Australians were being told they were electing.

SABRA LANE: It's a 67 per cent increase. As to the audit, the former treasurer says the new one needs to save his political capital for next year.

PETER COSTELLO: This is do able but it's only going to be do able with long, sustained, hard effort and the sooner we start the earlier we'll finish.